What’s Behind Israel’s Boom-and-Bust Economic Cycles? It’s the Occupation, Silly

One of the great successes of the Israeli government’s “Brand Israel” campaign has been the re-branding and re-packaging of Israel as a “Start-Up Nation”, attributing the source of its current wealth to its burgeoning hi-tech sector.

As we know, the best propaganda is based on grains of truth, aided by people’s short memory and selective access to information. To wit, the “Hi-Tech Israel” sales vibe is much louder and unchallenged in America than in Israel itself – where the majority of the population has seen little to no benefit from this sector, and where the young generation of many demographic and geographic sectors continues to be barred from entering hi-tech by neglect in education and (in the case of Israel’s Palestinian citizens) discrimination in hiring.

Some 9% of Israel’s non-government employment is provided directly by hi-tech. But as this article shows (Hebrew), at least 1/8 of them actually work in huge state-affiliated military industries, “grandfathered into” the hi-tech count by Israel’s government statistics bureau (notorious for providing the government the type of numbers it desires). That said, there is no denying Israel’s hi-tech is far stronger than the country’s size, and has driven growth. The question is, since when?

I happen to know firsthand. My father founded and ran a start-up company in Israel in 1982-1989, before they were known there as “start-up”; I even worked there myself in various minor roles. After employing up to ~50 employees and introducing novelties such as the flexible workday, it finally went bust. One of the main reason was, it was premature. Apart from a couple of branches of huge multinationals and a handful of success stories, Israeli hi-tech was a fringe phenomenon until sometime in the 1990s. In particular, finding reliable investors was ridiculously difficult. My older brother started university in Jerusalem in 1987, during one of hi-tech’s global cyclical downturns. Friends and relatives wondered why he’s taking up computer science, now that this esoteric sector has “dried up”.

Besides the stints for my dad’s ill-fated venture, I also worked in the Israeli hi-tech during its first major heyday, 1997-2002. Things have changed fast in this sector – it is globally fast and Israel has its own hectic pace to compound matters (that also explains some of its relative edge in hi-tech). To sum it up: Israeli hi-tech is young and its roots shallow. Israel was already wealthy compared to most nations, before the 1990s when its hi-tech finally became a major force.

Any other Explanations for Israel’s Wealth?

In August I researched and put together a long blog post that was finally published in Hebrew on September 1st on the Haokets (“The Sting”) website, a site dedicated to social, economic and ethnic justice in Israel-Palestine.

An English translation was posted on the influential 972mag website last week. That translation was laid out very nicely by the editors, with many pictures. I’m too lazy to just copy it now, and besides it won’t look as nice. What I’ll do here is a short “Cliff’s Notes” summary, together with some FAQ that keep arising around that text, and observations about the sad state of talkback threads

The Gossipy Context

The story leading up to Janet Yellen’s Fed nomination had a farcical doppleganger playing out in Israel, almost simultaneously. In both cases, the outgoing Central Bank head recommended his deputy as successor, which would make her the first-ever woman at the job. In both cases, the government had originally looked for someone else having a more “appropriate” set of chromosomes instead. And in both cases, the woman was eventually nominated, with the government getting nicely embarrassed in the process.

The Israeli case was more grotesque, with Prime Minister “Bibi” Netanyahu opposing the nomination of Dr. Karnit Flug for longer, more openly and more vehemently than Obama ever did. Bibi’s hostility towards Flug could not be explained by male-chauvinism alone (although that does exist, of course). Rather, sources point towards a 2007 macro-economic research report lead-authored by Flug (pdf; is it in English), analyzing Israel’s growth and recession cycles in 1960-2006 (the first year for which comprehensive data exist). While praising Israel’s adherence to neoliberal recipes in recent decades and claiming it does have a “statistically significant” positive effect on growth, the authors had to concede that the impact of Treasury policies in Israel is dwarfed by what they euphemistically called “geopolitics”.

This admission invoked Bibi’s wrath. For years he has built his reputation as “Mr. Economy”, who supposedly “saved” Israel’s economy in his 2003-2006 tenure as finance minister. Flug’s report, while polite and even reverent regarding Bibi’s macroeconomic leadership, still indicated that his claim to saving the Israeli economy is about as truthful as the proverbial fly riding on an elephant and boasting “Look how much dust we’re making!…”

It is this report that I dug my teeth into, easily finding what I had looked for. I called the original post “Dr. Karnit Flug’s Dark Secret”, an ironical reference to the failed-nomination farce that has been playing out in full swing at the time. Of course, to clarify: Flug has no personal “Dark Secret”. Rather it is Israel and entire its economic-intellectual elite, that is lying to itself about the nation’s economy.

Israel’s Biggest Boom – and Its Worst Busts

In essence, things are really really simple. Here is the article’s “Table 1″ of raw economic data summarized by major episodes, as identified by the authors. The most recognizable and internationally comparable number, is the per-capita growth rate (3rd column of numbers).

One episode sticks out as exceptional: 1967-1973, the “Post Six-Day War” Period. It has by far the highest growth, and is also among the longest periods (by rights it should have been the longest episode, but the authors had for some reason cut it 9 months short in December 72 instead of September 73).

In the article’s entire study period of 1960-2006 – and, now we know, also beyond it to 2013 – there is no other episode whose impact upon Israel’s economic growth has been so positive and so dramatic.

My article painstakingly goes through the consensus boilerplate theories explaining Israel’s relatively phenomenal growth since the 1950s, and shows that none of them even remotely accounts for the 1967-1973 growth boom.

What can? What really happened during these years: Israel redefining itself as “Greater Israel”, and setting up the Occupation regime. First and foremost, by far the greatest single factor, was the incorpoation of Palestinian day labor into the Israeli market. Within a couple of years after 1967, almost no manual labor was done by Israelis anymore; it was all Palestinians, with Israeli former laborers becoming their bosses. Add to this the exploitation of newly controlled natural resources and captive market, and the use of Occupation and its crises as a vacuum-pump siphoning in billions of foreign money – and you have a 4-cylinder boom-generating engine.

Look at the Gapminder map below. In these 6 years Israel’s per-capita GDP grew some 70-80%. It took Israel another 25 years or so, in fits and starts, to grow the next 70-80%.

Here’s the thing: the fact that our biggest economic boom happened in 1967-1973, is largely unknown among Israelis – not to mention outside of Israel. If you care to read the comment threads to the Hebrew and English versions, you’ll see that much of what went on there was people trying to deny the fact, or deny that it signifies anything, and being insulted at my “leftist” attempts to explain it (rather than ignore it as everyone else conveniently does).

Par for the course, Flug and Strawczynski who wrote the report didn’t feel compelled to explain the 1967-1973 boom, beyond the “geopolitics” lip-service.

What about Israel’s rather frequent economic busts? Start with the one that ended that very boom: the crisis triggered by the October 1973 war. The Israeli media in recent months has been full of stories and features commemorating that war’s 40th anniversary. But its fundamental nature is usually blurred.

The 1973 war was first and foremost an Occupation-generated crisis. Political memory in Israel is notoriously selective. People don’t realize that pre-1973, the Occupation’s crown jewel was not the West Bank, but the Sinai. Not only was the Sinai huge and spectacular; it also contained oil wells that could meet half Israel’s consumption.

It was Israel’s insistence on holding the Sinai indefinitely, that led Egyptian leader Saadat to launch the 1973 war. This war hurled Israel into one of its worst politico-economic crises. At its height, people had to down their vehicles for one day a week to save gas, and Israel immigration balance turned negative for the first time in its history.

Again, the 1973 war’s Occupation-caused nature is routinely sidestepped, ignored, even denied in mainstream Israeli discourse.

Two other major economic crises – in the late 1980s and in 2001-2003 – were directly triggered by the Palestinian revolts. The 2001-2003 one was perhaps the worst in Israel’s history in terms of relative depth and duration (of course, it was exacerbated by the global 9/11 recession; but we started our crisis many months earlier).

The period between the late 1970s and the mid-1980s provides an illuminating contrast. These years, divided into no less than 4 episodes in the Flug-Strawczynski table, have seen perhaps the worst economic mismanagement in Israeli history. Finance ministers changed almost every year, and switched policies even more frequently. Reckless experimentation alternated with strict austerity and crass electoral bribery of the public. To boot, the military invaded Lebanon in 1982 and occupied half of that country for 3 years, saddling the government with a huge additional debt. A bubble-generated stock-market collapse in late 1983 sealed the deal, forcing the government to buy all major banks, leading to a 400% hyperinflation in 1984, and to talks about indexing the Shekel to the US Dollar.

But throughout this period, except very short spells of grazing around 0% per-capita growth (on absolute level growth was still positive), the economy didn’t grind to a halt and people’s standard of living hardly suffered. I went through my teenage year and into military service during that time. Having prices creep up every week was inconvenient and even unsettling. But people’s salaries were COLA indexed, and there was almost none of the massive suffering associated with the deep recessions mentioned above. What gives?

“What gives” is that the Occupation prosperity-generating engine was at its zenith during that time. Palestinian labor was fully harnessed and still docile (not for much longer…). New settlements were established at a record pace, and mainstream Israelis discovered the advantages of buying a much larger home for less, on (stolen) West Bank land, and receiving far better government services there than at the crowded central-Israel cities. And the peace agreement signed with Egypt in 1979 (in exchange for returning the Sinai) reduced the Occupation’s overall geopolitical risk, and opened up new trade opportunities and more ways to receive foreign aid.

So the economy of a small 30-year-old nation survived almost unscathed, a dose of economic mismanagement that would have completely downed a much larger beast (think Argentina 2001). Mostly thanks to the Occupation.

Nowadays the tables have turned: Israel is larger (population-wise) and wealthier. Israelis still depend upon others for most manual labor – but nowadays Palestinian laborers are outnumbered by a motley crew of temporary(?) foreign migrants. Israel’s economy has increasingly gravitated towards its hi-tech sector (which really came into life only in the 1990s). As the 2001-2003 crisis showed, Israel’s hyper-modern economic aspirations are incompatible with an Occupation in the back yard. Certain sectors and businesses still profit from the Occupation, but overall it has become more of an economic burden than an asset – even before factoring in the resurgence of economic sanctions.

But it’s hard to get rid of something, when you deny its existence and impact.

Doesn’t It All Remind You of Something?

Here’s a bit that was *not* mentioned in the full texts, in either language:

From an economic-history perspective, Israel’s Occupation experience clearly identifies it as an experiment in colonialism. The world has seen it all before: at first, massive exploitation of labor, natural resources and captive markets delivers a sugar-rush of wealth. For a while, it seems like the perfect system for the ruling nation. Then the backlash: revolt, conflict, spiralling military costs. Corruption and rot destroy the colonial structure from within… and finally it’s over.

How can Israel’s experiment survive for so long? Perhaps because it is unique in so many ways:

1. The colony is in the home-country’s own back yard. Some of the new Territory was even added to Israel’s capital city.
2. All previous borders between “home country” and “colony” were erased from all official and quasi-official maps.
3. Israeli citizens were settled inside the Territories and gradually afforded all amenities and political-participation rights as if they still lived inside Israel;
4. Occupation expenses and revenue are embedded in a zillion places in the national budget, without demarcation;
5. The very nature of this experiment in colonialism is denied, and again, deliberately blurred.
6. Israel embarks upon this experiment, right after the very last major global colonialism projects are being dismantled. Politically, this makes the Occupation hard to justify from the get-go.
7. But for a self-denying, camouflaged colonial experiment, the timing is actually good because people don’t expect to encounter “classic” colonialism anymore – so this helps Israel to maintain “Plausible Deniability” about the Occupation.
8. Nowadays, the colonial regime can make use of post-modern technological tools of bureaucracy and surveillance.
9. The regime is heavily subsidized, if not completely funded, thanks to massive American military aid.

Finally, to clarify what the full-length post tried to convey, here are two “money quotes” from there:

“Start-Up Nation”? The most amazing start-up in Israeli history remains the establishment of the Occupation regime. One teeny problem: we forgot to make our strategically timed exit…

…If you are still confused as to what this little post’s message is:

Post-1967, Israel’s economy became an Occupation economy first and foremost. Setting up the Occupation regime gave us our biggest economic growth spurt. Since then, the Occupation’s woes have given us our worst crises.

Yes, there is also Israeli hi-tech, and there is also macro-economic policy. But studying Israel’s macro-economy without explicitly entering the Occupation regime into the picture, is – my apologies if this offends anyone – tantamount to economic malpractice.

Ok, enough Cliff’s Notes. Feel free to comment on them, or about the full-length post, down here.